Monthly Archives

June 2015

A new unicorn in the UK every six weeks

By | Forward Partners, Venture Capital | 4 Comments




Companies in Europe worth over $1bn
Screen Shot 2015-06-15 at 18.17.38

The above chart is lifted from a recent GP Bullhound report European Unicorns: Do They Have Legs?. It paints a pretty picture, for the UK and for Europe. In the last twelve months there were 8 new unicorns in the UK and 13 in Europe. That compares with 22 new unicorns in the US over the same period.

The fact that we’re creating larger numbers of big companies gives confidence to investors and provides fertile training grounds for the next generation of entrepreneurs and angels. It’s great to see.

That said, I’m going to finish with a caveat. For the reasons I gave above it’s critical that we create huge companies, but I think the pendulum has swung too far and the unicorn thing is now overdone. There are lots of great companies created which don’t get to $1bn value and at the earliest stages of investment the market opportunity generally isn’t clear enough to make investing in unicorns a viable strategy. The key discipline for every investor should be to ensure that every deal can be a fund returner, and with small funds that doesn’t require $1bn+ valuations. The real skill is putting yourself in a place to get lucky.

For Forward Partners that means investing in companies that can return the fund with exits in the £100-300m range but have a chance of going on to be much bigger. 60% of European unicorns are in the sectors on which we focus: ecommerce, marketplaces and software.

Will we persist with two mobile app ecosystems?

By | Apple, Google, Mobile, Uncategorized | 5 Comments

In the Apple App Store and the Google Play Store we currently have two vibrant mobile app ecosystems. Going back a few years the prevailing wisdom was that network effects would ultimately make this a winner takes all markets and that over time users and developers would eventually coalesce on a single platform. That was the lesson we all learned from Windows in the 1990s.

Then more recently people have been saying that both the ecosystems are large enough to be self-sustaining and that Google and Apple have both ‘won’.

That view made sense to me. Both ecosystems were growing and Apple’s dominance at the high end meant that developers mostly built for iOS first giving them sustainability in the face of Android’s faster growth. That’s part of the reason I ditched my long term allegiance to Android and bought an iPhone earlier this year.

Now new data from Apple and Google compiled by Benedict Evans is an early indication that the duopoly might not be stable after all (caveat: this analysis is based on a small number of datapoints and may be subject to large rounding errors).

IOS Growth Slow

The news is that iOS growth looks like it has stopped – Apple App Store revenue has flatlined at $10bn. Meanwhile Google Play Store revenues are continuing to grow fast. Extrapolating the trend lines for the last year suggests that Play Store revenues could overtake App Store Revenues this year.

There are many more Android devices out there and hence the revenue per device is significantly lower on Android, but there too the gap is closing.

For developers gross revenue on the platform and average revenue per device are key numbers and if/when the Play Store passes the App Store on these metrics I expect increasing numbers of developers will choose to go Android first, which will bring users across and further accelerate the growth of Play Store revenues. That in turn will encourage more developers to switch and we may see a repeat of the Windows movie from the 1990s when the winner takes all.

And I will have to switch back to Android.


Mindfulness makes you better at work

By | Startup general interest | 6 Comments

My friend Josh March recently said that meditation is “an essential part” of his “entrepreneurs toolkit”, a sentiment I’m hearing echoed by increasing numbers of entrepreneurs and startup execs. As you may have read here before I have been practicing mindfulness and meditation for two years now and found it hugely helpful in dealing with stress and improving my interactions with people, and at Forward Partners we have regular mindfulness sessions for all staff organised by Calmworks.

The way it works is that mindfulness practice, and in particular meditation, results in physical changes to two areas of the brain which affect these behaviours. The following is lifted from an HBR article:

[Regular meditators have a] bigger anterior cingulate cortex (ACC), a structure located deep inside the forehead, behind the brain’s frontal lobe. The ACC is associated with self-regulation, meaning the ability to purposefully direct attention and behavior, suppress inappropriate knee-jerk responses, and switch strategies flexibly. … [and] demonstrate superior performance on tests of self-regulation, resisting distractions and making correct answers more often than non-meditators. They also show more activity in the ACC than non-meditators. In addition to self-regulation, the ACC is associated with learning from past experience to support optimal decision-making. Scientists point out that the ACC may be particularly important in the face of uncertain and fast-changing conditions.

Adapting well to fast-changing conditions is key for entrepreneurs, and increasingly for everyone as change happens faster and faster. That’s big.

The second brain region we want to highlight is the hippocampus, a region that showed increased amounts of gray matter in the brains of our 2011 mindfulness program participants. … a set of inner structures associated with emotion and memory. It is covered in receptors for the stress hormone cortisol, and studies have shown that it can be damaged by chronic stress, contributing to a harmful spiral in the body. Indeed, people with stress-related disorders like depresssion and PTSD tend to have a smaller hippocampus. All of this points to the importance of this brain area in resilience—another key skill in the current high-demand business world.

Resilience is also essential for entrepreneurs. One founder of a successful company said to me earlier this year that his emotional lows are as intense as his emotional highs, but they last much longer! The ability to bounce back is an essential trait.

The HBR article concludes by saying “Mindfulness should no longer be considered a “nice-to-have” for executives. It’s a “must-have”:  a way to keep our brains healthy”. I agree, and like to make an analogy with exercise. Fifty years ago very few people took regular exercise and the science linking exercise to health and happiness was poorly understood. Nowadays everybody understands the link and a large proportion of society puts significant time and effort into keeping fit. Meditation today is where exercise was fifty years ago.

Investors shouldn’t finance races to the bottom

By | Venture Capital | 3 Comments

I just read Albert Wenger’s post about profit destroying innovation and am left wondering if we are entering a period where startups are tearing down incumbents but won’t become sustainable companies in their own right. We have become very efficient at creating super fast growth companies with low or non-existent potential profitability from their existing revenue models. These are often marketplaces with 0% take (i.e. they don’t charge for listings or purchases) or SaaS companies giving away features that competitors charge for in the hope of charging for something else later.

As Bill Gurley wrote recently:

it is materially easier to take a company to substantial revenue if you generously relax the constraint of profitability. Customers will love you for giving away more value than you charge

The dangerous dynamic we should be avoiding is financing businesses to substantial revenues that won’t eventually generate significant profits. That’s happening increasingly often as late stage investors pay up handsomely for high growth businesses without clear/credible strategies for reaching positive cash flow. These un-profitable startups undermine the profitability across entire markets in a way that may not be recoverable. Albert Wenger’s said the same thing differently when he wrote the benefits of innovation are accruing to customers rather than providers. When that happens it is investors who foot the bill.

Design is critical: Value proposition is paramount

By | Startup general interest, Venture Capital | 2 Comments

I’ve just read an interesting post on Venturebeat lamenting the fact that investors get carried away with design and user experience:

If the user experience seems to be great, often investors will conclude the founders have found product-market fit and the basic unit economics become less relevant. The path to profitability in most cases becomes: You’ll get profitable if you’re big enough.

The better alternative they say is to build something people want:

In 2014, we went through Y Combinator, whose mantra famously is “Build Something People Want” not“Build Nice Things, People May Want Them.” This is certainly something we take to heart.

At the end of the day this final conclusion is the right one. It is more important to build something people want than to build something that looks nice. Going further, what every company actually needs is a strong value proposition, where:

Value (to the customer) = Benefits – Cost

That’s an equation out of strategy textbooks from the 1990s, but it is entirely relevant to startups. Not only do you have to build something that people will want (i.e. it has benefits) you have to do so at cost that is acceptable to the customer and allows you to make a profit.

Design and user experience have grown more important in recent years because the benefits of convenience and joy in using a product are increasingly used as competitive weapons, but it is important to remember that without a strong primary benefit convenience means nothing and there is no joy.

In practice startups should focus first on building a product that resonates emotionally with customers. That product will have a strong primary benefit (e.g. quotes from four lawyers within 24 hours from our portfolio company Lexoo) and just enough design to make it usable by early adopters. If investors are over-indexing on design it is likely because ‘just enough design’ is becoming more and more as higher standards of design are becoming more pervasive generally.


Combining big ideas and lean development practices

By | Startup general interest | No Comments

Lots of Forward Partners portfolio companies have used lean development practices to great effect (many of them with our assistance) and all of them are pursuing big and ambitious projects (defined as targeting £100m-1bn+ exits). Hence it’s been troubling me that for some people lean methodologies have become synonymous with small ideas that offer only incremental improvement over the status quo.

I wrote a little on this topic last week in The importance of intent and the danger of incremental design.

With more thinking, more reading, and more discussions since then I am coming to the conclusion that people are confusing the importance/significance of the idea with the way that the idea is tested and developed.

Screen Shot 2015-06-09 at 10.17.07

The two by two matrix above illustrates that the scale of the idea and the methodology used to develop and test that idea are independent. Big or small ideas can both be developed using lean approaches or using a traditional ‘plan then build’ approach. I’ve highlighted the top right quadrant because big ideas that can be efficiently tested are what most investors are after.

An important point which is often missed is that lean/iterative approaches to developing ideas aren’t necessarily cheap. They are just the most efficient way of testing the idea. By way of example – Elon Musk’s Hyperloop is a big idea that could be tested iteratively by identifying the most important assumptions and testing them one after the other. First up might be to build a 50% scale demo to test whether the air cushion technology works and can be built cost effectively. Then second up might be a single route line from San Francisco to LA to test whether consumers will use the service and at what price point. After that a network might be rolled out nationally. I describe this overly simple to plan to make the contrast with going straight to the final phase of building a full scale national service.

In practice nobody would go straight from idea to national rollout, so this example makes it clear that all projects are subject to some level of iteration in their development. The point of lean/iterative development methodologies is to be disciplined about always identifying the most important assumptions and testing them as cost effectively as possible. That works for big ideas where the tests can be expensive, as well as big ideas where the tests can be cheap.


Robots falling over

By | Startup general interest | No Comments

I’ve written a lot about robots and AI taking jobs from humans and a little bit about the the arrival of super intelligence and what it might mean for society. Others have written a lot about the dangers of these technologies and how we will soon be bowing to our robot overlords.

Well, we’re not going to get there without a lot of work!

It’s a slow news day today and I’m posting a video of state of the art robots. Usually when I do that they are doing something cool. Today they are literally falling over. Imagine the damage that happens every time a big robot like these falls over! That’s tough for their owners.

AI replacing advisors – how will it work

By | Startup general interest | 3 Comments

Ric Edelman, CEO at Edelman Financial Services, one of the top financial advisors in the US, recently said:

I firmly believe that in the next ten years, half of all the financial advisors in this country will be gone

The reduction will come because AI and other technologies will soon perform many of the technical aspects of financial advice better than their human counterparts. What won’t go away in the next ten years is the more human side of the job. Edelman says “We are therapists, counselors, marriage consultants, and psychologists as much as we are financial planners.”.

The interesting question is how the change will occur. There are two options:

  • Existing firms like Edelman’s buy in or (less likely) develop the AI, make half their advisors redundant
  • Startups develop the technology and launch a low cost service which takes market share from the incumbents

Both of these will happen. Edelman is clearly thinking about how they leverage the power of AI and there are multiple startups going after this opportunity already. The real question therefore is which option will win. The incumbents have the advantage of currently owning the customer relationships so the battle is theirs to lose, but to win they will have to develop the capability to innovate and find the courage to slash their charges. History has shown us that incumbents rarely succeed in disrupting themselves like this, but at some point incumbent CEOs will learn the lesson.

This same dynamic applies in many other professions too. Law is one that we’ve been thinking about recently.

The ecommerce and marketplace opportunity is growing like crazy

By | Ecommerce | No Comments

Screen Shot 2015-06-04 at 11.01.24

In the last five years we have seen three new ecommerce and marketplace companies worth $10bn+, whereas in the last twenty years there were six US public companies in those sectors worth the same amount.

At Forward Partners we focus on ecommerce, marketplaces and related SaaS.

There are two takeaways:

  • The ecommerce and marketplaces opportunity has been yielding huge companies for two decades now
  • The rate at which $10bn+ companies are created has accelerated significantly

The inspiration for this post was Bessemer’s recent presentation about current valuations.

The importance of intent and the danger of incremental design

By | Startup general interest | 3 Comments

There’s been a lot of debate recently about the dangers of incrementalism. Peter Thiel wrote a whole book about it and Elon Musk is celebrated in part because his startups are so bold. Much of the criticism of incrementalism points to the swathes of apps and social sites that have been created in recent years as evidence that without big thinking you don’t get anything worthwhile.

These polarised opinions point to some important truths, but are also dismissive of some important developments.

It’s true that some, maybe even many, entrepreneurs build products that are only slightly better than the competitors that they copy, and that many others try to iterate their way to success from an impossibly poor starting point. However, it’s also true that some founders of apps and social sites build products with tens of millions of users and whilst they may not have changed the world it’s safe to say they have bettered people’s lives.

That is to say that company ideas don’t have to be as big as SpaceX to be worthwhile. There are lots of companies that are worth $100m-1bn that have made small but significant dents in the universe. Here in the UK I would put consumer companies like Mind Candy, Boohoo, Hailo and Zopa in that category (the last two are in our portfolio) as well as a host of B2B companies including the AI company Deepmind which was recently acquired by Google.

However, whilst smaller ideas can be worthwhile they still need to have some meaning, an intent behind them. Zopa’s founders were rallying against the bureaucracy and inefficiency of banks and Mind Candy was about creating amazing game experiences.

That intent informs initial product ideas which are then most efficiently developed and tested using iterative methods, but it’s the intent that provides the initial leap forward. Critics of incrementalism sometimes also criticise lean startup and other iterative development methodologies, but that confuses the best way to develop an idea with the quality of the idea in the first place. It’s true that some founders practice lean methods on low quality incremental ideas, but that doesn’t mean that all ideas developed with lean methods are low quality.